2018 holds a great deal of promise for Touchstone Exploration (LSE:TXP). Having raised £3million in early December, the company is about to embark on an accelerated 10-well drill programme across its producing oil and gas assets in Trinidad. If it is able to replicate the results of its last campaign this should mean the company comfortably surpasses its 2,000/bopd production target by late summer. This would be well ahead of schedule and leave plenty of scope for further drilling upside at the end of the year. With the shares currently sitting at 12.5p, valuing the business at £16million, this company looks primed and ready for take-off.
The magic number for Touchstone’s shareholders is 1,800/bopd. At slightly less than current oil prices, this is the production threshold Touchstone needs to cross to become profitable at the Plc level. If Touchstone continues to deliver operationally at the pace it did last year, this milestone could well be within touching distance.
Since it came to AIM last June, in a dual listing from Canada’s TSX-V, Touchstone has delivered on all of its targets, has attracted significant institutional backing (Norwegian-based North Energy Capital now owns 10.1% of the company) and has grown production to just under 1,500/bopd.
This performance has been somewhat matched by the company’s near 75% share price rise over the last 7 months, but so far the story hasn’t yet really caught the imagination of the retail market. At some point it probably will and then we could witness real fireworks.
A flurry of buying in late September saw Touchstone’s share price briefly kiss 17p intraday, only to fall back as interest waned. Over Christmas and into the New Year a bit of volume returned to the market and the price started to move higher again. However, Tuesday’s RNS took the wind out of that move’s sails, which was quite an impressive feat in many ways.
For those aware of the Touchstone story, the announcement was full of good news, not least that the company has secured a second rig for the start of that 10-well drill campaign.
This means that Touchstone will be able to conduct parallel drilling, for so long as it can retain the second rig. In other words, Touchstone has the opportunity to deliver double the expected news flow for a period of time. Forgive me, but I would have thought that drilling two wells at once might be seen as a good thing?!
But hey, ho, what do I know…
I can’t remember the last time I saw such unexpectedly positive news trigger a 9% sell-off!
Had this been any other company I was holding I would have been furious, but the fact is I am extremely confident about Touchstone and its management team. Never being one to look a gift horse in the mouth, I welcomed the opportunity the market gave with open hands and added to my holding. Ultimately it is the fundamentals that should be the driver here, not how well Touchstone writes an RNS.
Moving back to Tuesday’s “glum” update and there was plenty to be happy about. I’ve already mentioned the second rig, but the other main positive is that the first well is due to spud on Monday. Now that we know that Touchstone has a second rig at its disposal it seems a fair enough bet that a second spud could happen as soon as early February.
Both wells will be drilled on a fixed cost basis and if past performance is anything to go by will take about two weeks to drill. This would then set the company up for a frantic period of news flow. Assuming each well takes a fortnight to drill, a fortnight to demobilise and set the rig up on the next pad and a fortnight to test then Touchstone should be on course to bombard the market with news. With two rigs operating in parallel for a period at the same time, we could even be in for some sustained RNS ‘Shock & Awe’.
Of course, everything will then hinge on the results.
Tuesday’s RNS helps give some guidance here as to what we might expect. According to this, last year’s 4 well drill programme delivered an average production increase in November and December of 283/bopd. Total average production over the same period was 1,435/bopd. Reducing those figures to 250/bopd and 1,400/bopd respectively, if we assume that the 10-well campaign will deliver the same success rate this would mean Touchstone could be on course to be producing 2,025/bopd by late summer ((250*2.5)+1,400 = 2,025).
Admittedly this is a rough calculation, but it does illustrate how close Touchstone’s 2018 production target of 2,000/bopd could be.
Beyond that and Paul Baay has already gone on the record, saying he plans to build the company to 5,000/bopd by the end of 2020. There is no doubting his ambition, which if he is to realise then this year could prove to be pivotal. At 12.5p I am more than happy to come along for the ride.
In case you missed the online presentations and extensive Q&A sessions Touchstone’s CEO, Paul Baay, gave to ValueTheMarkets.com they can be watched here and here. If you aren’t familiar with the company they are an excellent place to begin your research.